Sunday, 9 September 2007

The war between Nokia and Apple

"When two elephants fight, the loser is the jungle." --Ancient proverb

And so it begins.

The Apple-Nokia war finally got underway on August 29, when Nokia announced an array of new music-capable phones and an online music store. The two companies had been eyeing one-another like wrestlers outside the ring for more than a year. Apple entered the mobile phone market, but only in the US, where Nokia is a non-factor. Nokia openly declared that it's a computing company (link), but its non-phone products so far have been different flavors of lame.

But the August 29 announcements put Nokia and Apple on a path to direct confrontation. I haven't seen a lot written online about the importance of this conflict. I think that's probably because many of the people who follow Apple's business closely are based in the US and have trouble taking Nokia seriously because it's a secondary player here. Meanwhile, Nokia's most ardent followers are in Europe, and look at Nokia's actions in light of its regional conflicts with SonyEricsson and the European mobile operators.

But when you stand back and look at what's happening in the industry worldwide, it's clear that Apple and Nokia both want very badly to be the dominant mobile computing company for young adults. That makes a huge, relentless conflict between them inevitable. They're like two armies trying to take the same hill. One's coming from the west, the other from the east, so there's not a lot of fighting at the moment. But as soon as they reach the hill, there's going to be an explosion.

I don't know who will win, but I'm pretty sure that the main losers will be all of the other device companies and mobile operators who happen to be hanging around on the hill.

My advice to them: Run.

What Nokia announced, and why it matters

On the 29th, Nokia announced four phones, two new data services for its phones, and a new brand. Let's start with the services.

The Nokia Music Store is just what the name says, an online music store run by Nokia. It'll be accessible by both PC and selected Nokia phones. The N81 and N95 will be able to talk to the store directly, while for a number of other Nokia phones you'll be able to buy music on your PC and sync it to your phone (Nokia calls this process "sideloading").

Nokia will offer more purchase options than iTunes does. You can either buy and download individual titles (for one euro a song, a euro cent above iTunes), or you can subscribe to the store and stream all the music you want to your PC (but not save it) for ten euros a month.

Nokia positions the streaming service as a way to discover new tunes, after which you're supposed to buy and download the ones you want to keep. I can understand the practical reasons for not streaming from the store directly to phones -- there would be issues with data charges, network capacity, latency, and so on. But I don't know how users will feel about that. If I had a streaming account on my PC, I think I'd expect to have the same service on my Nokia phone. And why wouldn't you want to discover new music while you're on the go?

The bigger problem is that the 120 euros you pay a year for a streaming service is 120 songs you could have bought and kept forever. That's one new song every three days. For comparison, the average iTunes user buys three songs a month. A music subscription service is a great way to get access to a lot of music quickly, but unless you want a colossally large music collection, it's a huge financial drain in the long run (I wrote more on the economics of it here). No wonder the music industry loves the idea of subscriptions (link).

The re- rebirth of nGage. The other new service Nokia announced was a mobile game store. You'll be able to try games for free on your Nokia mobile or PC, and then after purchase you can use them on the PC or sync them to your phone (curiously, Nokia calls this process "installation.") Nokia also promises multiplayer and community features.

Price per game will be six to ten euros, and Nokia says you'll be able to pay by credit card or through your phone bill if the operator enables that. No word on what the revenue split is.

The service sounds pretty interesting to me. The most confusing thing about it is the name. The nGage service won't work with all of Nokia's N-series phones. I know there's no official tie between N-series and nGage (the names were apparently chosen separately), but try explaining that to a typical customer in a store. Nokia has struggled and failed for years to explain to customers the S60 platform that it uses in a lot of its phones; picture adding yet another layer of confusion on top of that (link).

I think the other important challenge to nGage is flash. There's a huge supply of free flash-based games on the web, and a lot of them are the sort of quick-reward, easy to use games that seem to do well on mobile devices. The biggest barrier to using them on mobiles is that Adobe charges for the mobile flash player, and so relatively few mobile phones have it installed. A small installed base of phones means that most developers don't target mobile flash. If Adobe ever drops the charge for the flash player, or if a free flash-equivalent comes along (perhaps a mobile version of Microsoft Silverlight), it might become very difficult to convince people to pay for nGage games.

I know nGage provides a higher-quality gaming experience than flash, but I'm not sure most mobile users will care enough to pay.

Ovi is a new brand that Nokia will use as a wrapper for all of its mobile services, including games, music, maps, photo sharing, and presumably more to come (link). I guess that makes sense from a convenience standpoint -- there will be one website (ovi.com) where you can go to discover all of the Nokia services (Nokia employees say that it will also be a gateway to the services of other companies as well ). Unfortunately, Ovi apparently won't work as a compatibility mark: the phones that can use one Ovi service can't necessarily use another. For example, many of the phones that can run nGage games can't directly connect to the music service. A brand is most effective when it represents a coherent idea or consistent product. I think Ovi creates an expectation of coherence but doesn't deliver it. It just says that Nokia's in the service business, which Nokia cares about but is not something that concerns users

If Nokia doesn't make all the Ovi services work on all its data-capable phones quickly, I think the varied incompatibilities between the Nokia services and devices are going to be a nightmare to explain at retail.

The four new phonesThe N95 8GB adds more memory to Nokia's flagship Swiss army knife phone, which includes a 5 mp camera, improved 3G, WiFi, and GPS. This is the one that online reviewers always compare to the iPhone. It works with both nGage and the music store, and its base price is 580 euros before subsidy.The N81 is a slider phone with WiFi and 3G, and has dedicated buttons to access both nGage and the music store. It'll sell for 430 euros pre-subsidy.The 5310 is a slimline candybar phone that can play music synced from the Nokia music store. It cannot access the music store directly. It has dedicated music controls next to the screen, and its base price is 225 euros.The 5610 is similar to the 5310, but adds a slider and built-in camera. Its base price is 300 euros. A lot of online reviewers have been comparing this and the 5310 to the SonyEricsson Walkman phones, and I think that was probably Nokia's thinking. But hold that thought because it's not necessarily how things will work out.

What's the impact? A huge amount depends on execution. How well will Nokia's new services integrate with the phones? How easy will it be to play songs and games? How many titles will be in the Nokia stores, and how good will they be? Services and mobile devices often live or die on the little details of usability, and we can't judge that for Nokia yet because we can't play with the new products and services.

But Nokia's direction is very clear. It wants to be in the mobile Internet services business, as both a developer and publisher of content and services. It's going to tie those services directly to its phones. And knowing Nokia, it'll keep iterating on both the phones and the services until it gets them right.

That's why Apple and Nokia are now at war. Even if Nokia's current products turn out to be lame, it's going straight into the territory that Apple has been pursuing ever since the first iPod shipped.

Apple's new products. I should add a little context on Apple's recent product announcements. In September, Apple made a lot of changes to the iTunes and iPod lineup. The move that got the most attention was the price cut of the iPhone from $599 to $399. I'll write more about that below. The other changes that stood out to me were:--iTunes can now be accessed via WiFi on the iPhone and iPod Touch. This corrects a glaring weakness in the original iPhone. It's interesting that Apple apparently hasn't enabled the iPhone to talk to the store over a cellular connection. That may be because the network the iPhone uses in the US is too slow to easily download music, or it may be that AT&T doesn't want a lot of data traffic going over its network when the phone's data plan is flat-rate.--The video version of the Nano, starting at $199, is a heck of a lot of technology in a very cute little package.--The iPod Touch is basically an iPhone without the microphone and cellular radio. It makes a really interesting PDA for people who want to buy a basic voice phone and carry their entertainment separately. It's priced at $299.

(As an aside, I have a request: Once the iPod Touch starts selling like gangbusters, would someone please go find the person at Sony who decided the Clie handheld business was a dead end, and kick them in the shins?)

Relative strengths of the competitors

Or, how to piss off both Apple fans and Nokia fans in the same post.

Apple and Nokia are very different companies. Here are their relative strengths:

Resources. No contest. Although Apple is a very successful company, Nokia has vastly more financial resources.

Logistics. Nokia is one of the greatest logistics companies on the planet. It churns out hundreds of millions of phones, changes models frequently, and almost everything works properly. If Nokia were running the US Federal Emergency Management Agency, New Orleans would be 20 feet above sea level by now. Apple, by contrast, does a very competent job of managing contract manufacturers in Asia. Advantage Nokia.

Telephony experience. Another huge Nokia advantage. Designing phones and getting them qualified on networks is really tricky, and Nokia knows how to do it better than anyone else.

System design skill. This is Apple's core competence; it knows how to design hardware and software together to create a beautifully integrated system. Nokia's phones often appear as if their hardware and software were designed by completely different groups and slapped together at the last minute (because, in many cases, that's exactly what happened). This works great in commodity phones, but if the competition is for who can create the most elegant data experience, Nokia is at a huge disadvantage.

Brand power. Wow, this is a tough one. Apple has one of the coolest brands on the planet. Nokia's brand is beloved in Europe, and in most of the world it personifies upward mobility (except in the US and Japan). I call this one a tie.

User interface. Apple knows how to design these. The kindest thing you can say about Nokia's interface designs is that they're better than many other phone manufacturers. But that's like comparing a three-legged dog to a two-legged dog. Nokia's trying to get better -- at the announcement event, it showed video of a forthcoming device with an iPhone-style touchscreen (link). But for now, this one's clearly a strong Apple advantage.

Cleverness. Hey, it's Steve. Nokia's management is extremely smart, but you look to them for great operational execution, not brilliant strategy. After all, this is the company that brought us the original nGage.

Industrial design. I'm going to get flamed by the Nokia fans for this, but Apple has a clear advantage in design. The comparison: Nokia sometimes creates a great design. Apple rarely creates anything less than a great design.

Music solution. You'd think this would be an overwhelming advantage for Apple, but its arrogant handling of the music companies has made them even more desperate to tear Steve Jobs' throat out. They're anxious to work with someone like Nokia. Apple still has an advantage, but it has opened the door to competitors more than it had to.

Breadth. Nokia can fight on more fronts, and might be able to outflank Apple. For instance, Nokia's revived nGage game service gives it a second interesting offering for young people, whereas Apple is limited to just music and video. This is why I think Apple's decision not to open the iPhone to third party app developers is a huge mistake. If Apple had the help of third party developers, it could more easily fill out its software portfolio.

How they'll fight

Nokia wants a war of attrition. It will try to force Apple to compete on more fronts than it can afford to cover. I think we should expect to see a broad array of services added to Ovi quickly, aimed at enticing young adults in all sorts of different ways. Nokia will probably also launch a blizzard of media and entertainment phones with varied features, in the hope that a couple of them will hit sweet spots in the market.

Apple's game is to keep Nokia off balance and grab the most important opportunities. Think of a fencing expert: dodge, feint, and then stab the other guy in the heart. Apple currently has a product advantage -- its music service is already working. So it will try to capture as many customers as it can before Nokia gets its act together.

Apple can also use Nokia's size against it. Nokia has a huge product line and has to position each product carefully within it. Apple has only one phone, so it doesn't have much to protect. That's where the iPhone price cut comes in. The iPhone had been positioned against the n95, at the top of Nokia's product line. With the price cut, the iPhone is now looks much closer to the middle of Nokia's line, the phones that were supposed to be aimed at SonyEricsson.* Nokia can't slash the pricing of the n95 without screwing up the prices of its entire line, so with one price action Apple accomplished two things -- it can reach a lot more customers, and it forced Nokia to go back and rethink its competitiveness.

We should expect more surprise moves from Apple. It's more important for them to keep Nokia off balance than it is to please every customer. I think that's why Apple was willing to piss off the iPhone loyalists with a sudden, large price cut.

*Because of varying subsidies, it's hard to tell what the actual street price comparison between the new n95 and iPhone will be. The current n95 sometimes gets subsidized down by several hundred dollars if you buy a multiyear service contract. Maybe the new n95 will be subsidized down below iPhone prices. Maybe the iPhone will be subsidized too. Or maybe now that Nokia's offering its own services the operators will refuse to keep subsidizing the n95. We need to wait until the iPhone and Nokia's new services premiere in Europe this fall.

Impacts of the war: Alas, the innocent bystanders

The common denominator between Apple and Nokia is the imperative to move quickly. Nokia wants to broaden the competition fast, Apple wants to keep surprising Nokia with new features, products, and other changes. That's going to accelerate the pace of change in the mobile industry. And the accelerating pace of change, rather than anything in particular that Apple or Nokia have done today, is the biggest challenge to the rest of the industry. The other players have been struggling to keep up with the current rate of change; what will they do when Apple and Nokia step on the gas?

I've seen these situations before. You think you're just about keeping up with a competitor, and suddenly they disappear in a cloud of dust. I believe that's about to happen in mobile phones.

A shift from hardware design to systems design. Let's look at which companies have been most successful in smartphones: RIM creates e-mail phone systems that combine hardware, software, and services. DoCoMo and the other Japanese operators drive systems designs that combine hardware, software, and services. The iPhone does the same. Previously, those competitors were confined to particular countries or relatively small vertical markets, but now the world's biggest phone company is trying to do the same thing. That raises the competitive bar for everyone else in the industry.

What are companies like Samsung and Motorola supposed to do? They don't know how to create their own services, let alone integrate one well with a phone. In the music market, there are a lot of third party services out there, but none of them have been effective so far at challenging iTunes. I think they're not strong enough to change the competitive situation. Same thing for the operator services.

So the music phone market looks ugly. What's worse, if Nokia and the systems companies extend their new design approach to other data markets, the traditional mobile phone companies might be cut out of most of the big growth opportunities. They need to learn a new set of skills instantly, and they're far behind the curve.

The interesting potential exception to this situation is SonyEricsson, the leading vendor of music-enabled phones in Europe. Their hardware's nice, and they have a clean user interface that looks inspired by the iPod. Because I'm in the US, I don't have a good read on how smoothly the SonyEricsson phones integrate with operator and third party music stores. Is the experience as easy as using iTunes?

The Register says that Omnifone's Music Station is a promising possibility (link), but it's a subscription service costing 3 euros ($4.11) per week. For that same price you could buy 216 songs on iTunes per year, and at the end of the year you'd actually own something.

I really have trouble seeing the long-term economic benefit of a music subscription service for a user. If you subscribe to one, please post a comment and educate me.

SonyEricsson's management hinted to Time Magazine that it may create its own music service (link). If so, it had better hurry up. I have a lot of respect for SonyEricsson's hardware designs, but if it's limited to music stores with weird business models and ones that don't integrate seamlessly with its phones, it's going to have a very hard time outcompeting an accelerating Apple and a Nokia that's learning to integrate solutions.

Microsoft: Reverse course, again. This is the situation in which Microsoft could have stepped in to offer a music service to the phone companies challenged by Nokia. But in an exquisitely ironic move, Microsoft basically shot its licensed music store initiative last year in order to support the proprietary Zune. Now it can't step up to the opportunity.

Oops.

Microsoft is probably too late to recover in music, but as Nokia adds new services there should be a lot of opportunities to license equivalents of them to Nokia's competitors. Microsoft should focus less on selling its own OS, which scares the phone companies, and more on delivering services they can build into their phones.

And oh by the way, it's time to bury Zune. The iPod Touch just lapped it. If Microsoft wants to lose money on proprietary hardware, it should focus on Xbox. At least there it's buying market share for its money.

The operators lose control. They were struggling to establish their own services suites back when things were moving slowly. Now that Apple and Nokia are shifting into high gear, I don't see how the operators can keep up.

You can find very different scenarios online for where this will lead. Andrew at the Register predicts that the operators may strangle Ovi by refusing to sell any phones that support it (link). He has a good quote from someone who knows both Nokia and the operators:

The operators own the relationship with the customer. They're not going to allow Nokia to own it.

On the other hand, Richard Windsor, the excellent telecom analyst working for Nomura Securities in London, said in an e-mail brief that the operators are doomed:

Through their inaction, mobile operators have squandered the opportunity to be the service integrator for mobile and are left with the prospect of offering nothing to users except commodity data packets.

Who will be right? It depends on Nokia's ability to generate user demand for its services. If the users want the services, the operators will have to go along with it. I assume Nokia understands this and is prepared to do a big marketing push. Unlike Nokia's previous efforts to set up content portals, this time it has to succeed or it surrenders the future to Apple. So the conflict with Apple also locks Nokia into a war with the operators.

Isn't this fun?

If I were running a mobile operator, I'd stop trying to create my own services bundle, and focus on enabling as many Internet companies as possible to deliver services on my network, in exchange for a small cut of their revenue. An operator with the innovation of the open Internet behind it might be able to keep up with Nokia and Apple. But an operator working alone will be very lonely indeed.

What does it mean for users? You'd think that all this new competition would be good for users, and in many ways I'm sure it will be. But Apple and Nokia are both showing a disturbing tendency to keep everything proprietary. The iPhone is not open to third party developers, and at this point Ovi appears to be about marketing Nokia services, not opening up the richness of the Internet. (To be fair, Nokia employees say that will change, but I'm not sure if they mean that they'll offer access to any Internet service, or just to some selected ones that they cut a deal with. I suspect it'll be the latter.)

Welcome our new Apple and Nokia overlords. There's a disturbing possibility that we may end up exchanging one set of walled gardens for another. They'll be lavish, beautiful gardens, far better than the operators' truck farms for data. But we may not get the open data marketplaces that a lot of people have been hoping for.

If you want to read other perspectives on Nokia vs. Apple, check these out:-A confident view from Finland (link)-A cautious view from Jupiter Research (link)-An outstanding article by Mark Halper at Time, with quotes from Nokia and SonyEricsson (link).